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Huawei crackdown

Huawei in 'survival mode' as suppliers race to beat US deadline

Less than three weeks remain to ship vital mobile chips under last crackdown

Analysts warn that Huawei's smartphone shipments could plunge nearly 75% if its inventories of crucial mobile chips dry up.   © Reuters

TAIPEI -- Huawei Technologies and its suppliers are working around the clock to beat a U.S. government deadline for shipping crucial mobile chips to the Chinese smartphone maker, part of a Washington crackdown that industry insiders say has the company fighting for survival.

The leading Chinese smartphone maker is stockpiling 5G mobile processors, Wifi, radio frequency and display driver chips and other components from key chip developers including MediaTek, Realtek, Novatek, RichWave and others, sources told the Nikkei Asian Review.

These chips are crucial to Huawei's smartphone business, but the U.S. announced on Aug. 17 that foreign chipmakers are barred from using American technology to supply them to the Chinese company unless they receive a special license. Suppliers are allowed to ship orders that were already in the pipeline when the restriction was announced -- but they must be delivered by midnight on Sept. 14, which is less than three weeks away.

If the company runs out of these crucial components, analysts say Huawei's handset shipments could fall by as much as 75% next year.

To meet the U.S. deadline, some chip suppliers have even agreed to ship half-finished products or wafers that have not been tested or assembled, the sources said. Normally when chips are made, complex integrated circuits are built onto wafers, which are then processed for packaging and testing. Only then are the finished chips shipped to customers such as Apple, Huawei and Samsung for final assembly in electronics devices.

"It's not unusual for Huawei to call suppliers at 4 a.m. or have conference calls at midnight recently," a source familiar with the matter said. "Huawei is in a chaotic survival mode now, and changing its own plans constantly recently."

Another industry source agreed that this is a matter of survival for the Chinese company. "We will fully comply with U.S. regulation but try to meet customer's needs. ... We have only three weeks left that we can ship products to Huawei [without U.S. approval], so we will ship some finished chip products as well as some half-finished products or chip wafers just out of the plant that have not yet been packaged and tested," the person told Nikkei. "Huawei is battling for survival."

Memory chip suppliers such as Samsung Electronics and SK Hynix, as well as camera lens providers Largan Precision and Sunny Optical Technology, are also trying to ship products that Huawei ordered earlier this year before the Sept. 14 deadline, as their manufacturing processes all make use of American technologies and software, sources said.

The scope and suddenness of the ban, Washington's harshest yet against the company, has shaken the global tech industry.

"The new ban is so wide-reaching and the new rule came very abruptly with such short notice when Huawei and all the suppliers were still working to mitigate Washington's previous expansion of restrictions in May. ... It's quite shocking and unexpected to Huawei and many of its suppliers due to the short notice of the ban," said another Huawei supplier executive familiar with the situation. "The whole supply chain is still bracing for collateral damage as many forecast orders will fall to zero after Sept. 15, and not every component can be sold to someone else. We are still digesting how big the downside could be for overall demand."

The problem, the source added, is that there is "limited room to push forward too many advanced chips given the short notice of the deadline. ... Only minor adjustments are possible now."  

The restriction is such a serious threat to Huawei because American technology and intellectual property -- from software to equipment and materials -- is a fundamental part of the global chip supply chain. Unless Washington revises this ban, the clock is ticking for suppliers to ship their final round of products without a license.

"What they want to secure most desperately are 5G smartphone processor chips and chips related to high-end smartphones now," another source familiar with the matter said. "But if the U.S. does not lift the ban later, even if it secures some chips now, Huawei's smartphone business will hit huge setbacks. It's very difficult to design new products with inventories."

Huawei's inventory-building efforts this time are mainly mobile chip-related products for its smartphone business, as the company already stocked up as much as two years' worth of chips for its telecom equipment business, Nikkei earlier reported.

Huawei publicly confirmed its inventory-building efforts for the first time in late May, announcing it had spent 167.4 billion yuan ($23.45 billion) stockpiling chips, components and materials in 2019, up 73% from the previous year. The Chinese tech company has been hoping that the U.S. would eventually loosen restrictions on its consumer electronics and smartphone business. However, the Trump administration has only acted to close any loopholes by which the company could secure crucial electronics components.

Contract chipmakers such as Taiwan Semiconductor Manufacturing Co. and China's Semiconductor International Manufacturing Co., which use American technologies in their manufacturing process, were already banned from taking new orders to make chips specifically for Huawei and its chip design arm HiSilicon Technologies without a license under a U.S. restriction announced in May. The latest crackdown means they can no longer supply "off-the-rack" products for the Chinese company, either.

TSMC already confirmed that it will not be able to ship any chips to Huawei after Sept. 14. Huawei turned to mobile chip designers like MediaTek to buy standardized mobile processors in order to keep its smartphone business afloat, but the Aug. 17 ban blocks such alternatives.

U.S. crackdowns have already crippled Huawei's chip design capabilities. Richard Yu, consumer electronics chief at the company, told a recent tech forum that the current generation of its in-house Kirin mobile processor, used in Huawei's premium smartphones, will be the last, and the line will go "extinct" due to Washington's actions.

The latest U.S. clampdown came as Huawei's smartphone business marked a milestone in the April-June quarter, overtaking Samsung Electronics as the world's No. 1 smartphone maker by shipments for the first time.

"It's almost impossible for Huawei and its key suppliers to get rid of U.S. tech any time soon," Jeff Pu, a tech analyst with GF Securities, told Nikkei. "Huawei could still ship some 195 million units of smartphones this year thanks to the inventories it built up previously, but the company's handset shipments for next year would be reduced to around 50 million units due to the Washington clampdown if the U.S. does not change or ease the rules later, according to our estimate."

MediaTek told Nikkei that it will "fully and strictly" comply with global trade-related regulations and said it will not ship half-finished products, or chips that have not been tested and packaged to its customers.

Novatek likewise said it will follow the export control rules and is working closely with outside counsel for guidance. The display driver IC chip developer added that it is maintaining its previous financial guidance for the July-September period.

Largan said it "cannot comment on any specific client's situation," but added that any component shortage in the supply chain would affect its own shipments. "We continue to monitor the supply chain dynamics and relevant regulations."

Huawei, Samsung and SK Hynix declined to comment. Sunny Optical and Realtek did not respond to Nikkei's request for comments as of publication time.

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